The Genre company is the manufacturer of two products the Basic and the Advanced .Details of production data and product cost data are as follows:
Basic Advanced
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Direct labour 2 hours 3 hours
Manufacturing overhead 2 hours 3 hours
Direct labour cost per hour $15 per hour $15 per hour
Production 2000 units 10000 units
Manufacturing overhead has traditionally used direct labour hours to calculate the predetermined overhead rate.
The Manufacturing overhead budget is as follows:
Set up costs $360,000
Engineering costs 180,000
Machine related costs 900,000
Plant related costs 192,000
Total $1,632,000
The Genre company has traditionally priced its products at 120 per cent of manufacturing cost .
Recently the Genre company has found it has had difficulty selling its advanced product with a competitor entering the market from overseas and making substantial sales at a price considerably below Genre’s price for the Advanced product .
The CEO of Genre ,Jane Monk, cannot understand how this could be and has asked you to investigate the matter.You start to examine some of the data and decide to check out a new approach to allocate costs called Activity Based Costing .You have managed to identify the following
information:
Activity Cost Pool Cost Driver Budgeted level of Cost Driver
Set up costs Number of production runs 80 runs
Engineering costs Engineering changes 200 engineering changes
Machine related costs Machine hours 18,000 hours
Plant related costs Floor space in sq ft 3,840 sq ft
In addition the following information has been determined :
–The Basic product is manufactured in production runs of 50 units each and the Advanced product
is manufactured in 250 unit batches
–75% of the engineering changes are used by the Basic product with the remaining 25% used by the
Advanced product
–Each Basic product requires 4 machine hours whereas each Advanced product requires 1 machine
hour
–The plant has 3,840 square feet of floor space with 80% of it used in the production of the Basic
product
Required:
Using the information above and your knowledge of Activity Based Costing you are required to provide answers to the following :
(a) Calculate the predetermined overhead rate that would be used under traditional overhead
costing
(b) Calculate the product cost per unit for the Basic and Advanced products under traditional costing
(c) Calculate the price that would be charged for the Basic and the Advanced products under
traditional costing
(d) Calculate the cost per Activity for each cost pool.
( e) Calculate the cost per unit for Basic and Advanced products using Activity Based Costing
(f) Based on your calculations with respect to Basic and Advanced products comment upon whether
either product has been overcosted or undercosted
(g) Discuss the benefits that can be obtained from using an Activity Based Costing system and whether it would be useful in costing the current products
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